A sustained increase in the prices of the goods and services we buy increases the cost of our living expenses.
By contrast, the latest rate of increase in employees’ wages is 4.9% in the three months to October, according to the Office for National Statistics. This is significantly lower than the 5.1% inflation rate, and means that salaries aren’t keeping pace with the cost of living.
Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “People are watching the prices of everyday necessities rise before their eyes. This is the kind of inflation that is felt by almost everyone, although clearly those on low and fixed incomes such as pensioners, face the toughest struggle to keep their standard of living within their budget.”
“Budgeting will need to be turbo-charged for those with little disposable income left at the end of the month. It could push some people further into regular overdraft and credit card use, or result in some families being unable to pay their bills. People who have been relatively relaxed about the need to budget in the past may also need to consider belt-tightening.
The rise in inflation is expected to encourage the Bank of England to raise interest rates. The International Monetary Fund has predicted that inflation will hit 5.5% early in 2022, and has warned the Bank that some action is required to curb the rise. However, so far, there has not been a rise in states as the Bank stated it was waiting to see how the omicron coronavirus variant would impact on the economy.
If the Bank raises interest rates sooner rather than later in a bid to curb inflation, it will benefit savers as it will mean a higher return on (some) savings accounts. At the moment it’s impossible for savers to stop the value of their savings from being eroded by inflation.
A rate rise would be bad news for borrowers, however, as it would mean higher mortgage costs for those on variable or tracker deals. If you’re worried about the impact a rate increase could have on you, read our article What can you do to prepare for an interest rate rise?
You can learn more about inflation and the impact it has on your finances in our guide What does inflation mean for my money?